0Forum Selection Clauses: More Than Just Boilerplate
Clients often ask whether all those “boilerplate” clauses at the end of a commercial contract are really necessary, and if so, why can’t they just be copied and pasted from earlier agreements. This article will focus on just one such clause, the “forum selection” clause, and hopefully persuade you that such clauses are critical and require careful consideration from lawyers and clients alike.
The Benefits of Choosing Your Forum
Let’s use an example to set the stage: imagine you are a business in New York and have just negotiated an important agreement with a key supplier in California. The economic terms of the contract are favorable to you, so in your desire to close the deal, you instructed your lawyer not to worry too much about those boilerplate clauses at the back of the contract, and you did not include any clause indicating the forum in which any later disputes would be decided. After the post-closing honeymoon is over, a dispute emerges. While you are attempting to work it out with the supplier, it pre-emptively sues you in California, simply to gain home field advantage. You now face the prospect of having to obtain local counsel in California, deal with the unfamiliar rules there, and most importantly, your witnesses, and perhaps the better part of your management team, may well have to make multiple trips to California over the next couple of years to attend depositions and hearings and meet the other requirements of the case. The absence of a forum selection clause in your contract has not only guaranteed that you will have to deal with legal proceedings 3,000 miles away, but also has induced your counterparty to start a lawsuit even as negotiations were pending, simply to gain a tactical advantage in the event that negotiations fail. The hypothetical can be made even starker: imagine the supplier is not in California, but in a foreign country whose courts you do not trust to resolve your dispute fairly and efficiently and whose government may have close ties to your counterparty.
As these examples show, forum selection clauses provide several important benefits. First, they provide certainty. It can take untold expense and months of time to fight in two or more jurisdictions. A well-crafted forum selection clause will nip this in the bud and allow the parties to deal with the merits of their dispute without a prolonged and expensive procedural battle.
Second, forum selection clauses can make parties less trigger happy. If there is no forum selection clause in a contract, each side will have an incentive to race to the courthouse to lock in home field advantage as soon as a dispute arises. (Many courts apply the “first filed” rule under which the first-filed case will be permitted to take precedence.) The absence of a forum selection clause thus can impede the parties’ ability to negotiate their differences prior to the expense of filing a lawsuit.
Third, although all lawsuits are potentially costly, cases in inconvenient forums can impose costs and other problems that are particularly burdensome and unwelcome. If a case will involve multiple depositions, for example, the travel time and distraction of those depositions and the sheer distraction on management’s time could be a substantial deterrent to continuing the fight.
Fourth, not all courts are equal when it comes to expertise, experience, fairness and predictability. Many parties select forums such as Delaware or New York because the courts there have well understood rules and frequently deal with complex commercial disputes. More remote forums, and courts in other countries, may not be as familiar with standard commercial dealings or the customs and usages of the parties. Even when choosing among relatively sophisticated forums, local rules and procedures may vary in ways that matter a great deal to the outcome. Jury pools differ from place to place. And not every forum moves cases equally quickly. Some courts, particularly in foreign jurisdictions, can take many years to resolve even a basic commercial dispute. Failing to choose a forum that can resolve your dispute in an acceptable time frame can effectively deny you a forum altogether.
Things to Think About When Crafting Forum Selection Clauses
So a forum selection clause is an important part of any business contract. But what are the issues you need to keep in mind in crafting a forum selection clause? The following is a non-exhaustive list.
- Mandatory v. Non-Mandatory. A forum selection clause is mandatory if it requires the parties to litigate a dispute in a particular forum. Many forum selection clauses, however, are not mandatory, and simply say that the parties “may” or “can” bring a lawsuit in a particular place, meaning that the forum is simply one of various acceptable options. If you want certainty, make sure your forum selection clause uses forceful, mandatory language, such as “shall” or “will,” and specify that the designated forum is “exclusive.”
- Scope. Having a forum selection clause in your contract does not necessarily guarantee that every dispute you have with your counterparty will be decided in that forum. Imagine your clause says that disputes “concerning this contract” will be decided in forum X. What if your counterparty accuses you of fraud or a business tort? Would that be decided in forum X? Perhaps not. For greater certainty, use a broad clause, such as that applies to “any and all disputes arising out of, in connection with, or relating to this agreement and/or the transactions and relationships among the parties contemplated by this agreement.”
- Enforceability and Nexus. Can you and your counterparty force the courts of your selected forum to decide your dispute? Sometimes not. Although forum selection clauses are generally enforced, some courts will decline to enforce such a clause if the contract or parties have no connection to the forum. Courts also may decline to enforce forum selection clauses where the parties’ negotiating power was unequal, or the application of the clause may result in unfairness (such as in consumer transactions), or the forum selection clause might violate public policy. Make sure you understand the rules of your chosen forum in this respect, or choose a forum whose rules allow it to be selected even absent any connection. New York’s General Obligations Law § 5-1402(1), for example, provides that if an agreement creates an obligation of at least $1 million and the parties have stipulated to the exclusive jurisdiction of the New York courts, the New York courts will decide the case even if other forums might have a stronger connection to the parties or the subject matter of their dispute.
- Personal Jurisdiction. Courts will decide a dispute only if they also have personal jurisdiction over the parties. To avoid a problem where a party agrees to a forum but then argues it cannot be sued there due to a lack of personal contacts with the forum, make sure your contract has the parties agree to personal jurisdiction in the forum. For maximum efficiency, the parties might also waive personal service or other service requirements.
- Forum Selection Clauses and Arbitration. Some believe that simply because they have an arbitration clause, they need not worry about forum selection. Not necessarily so. Once the arbitration is won, there must be access to a court to enforce the award. And in the absence of a forum selection clause, the parties might dispute which forum is appropriate for that proceeding. Avoid this problem by adding a sentence to your arbitration clause specifying the court in which any arbitration award may be enforced.
- Federal v. State Courts. Some forum selection clauses say that any disputes will be resolved “in the federal courts” or “in the business litigation session” of a particular state or city. But federal courts are courts of limited jurisdiction, as are most business or complex litigation sessions, and simply stating your preference to litigate there is not enough to ensure that the dispute can be dealt with there. And if it cannot be dealt with there, your forum selection clause is then unenforceable. To avoid this problem, many clauses choose the “federal or state courts” of a particular location, or simply do not specify which courts within a particular geography. If your preference is to be in federal court, the clause can specify “the federal courts of X, or, in the event the federal courts of X do not have jurisdiction, the state courts of X.”
- Non-Signatories. Can forum selection clauses bind entities that are not parties to the contract? In some circumstances, where the non-parties are related to one of the contracting parties and the dispute involves the same subject matter as one that is subject to a forum selection clause, the courts may conclude that the disputes can or should be addressed in the chosen forum, even when they involve a non-party. But the general rule is that a party is not bound by a contract he or she did not agree to. If there are people or entities involved in the transaction who would likely be involved in any later dispute, the safest solution is to have them agree to the forum in advance.
- Multiple Agreements. Many business transactions involve several related agreements. What happens if only one of the agreements has a forum selection clause? In some courts, an analysis is performed to determine whether the agreements should be viewed as part of a unitary transaction, in which case the forum selection clause in the main agreement might apply to disputes arising under a related agreement. But for greater certainty, it is always best to have all of the related agreements include or at least incorporate the same forum selection clause.
- Choice of Law v. Choice of Forum. It is important to remember that choosing where the dispute will be decided is not the same as choosing what jurisdiction’s law will govern the dispute. It is possible for those choices to be different ones: for example, the parties may agree to a New York court applying Delaware law. Keep in mind that the forum selection clause locks in the geographic location, and the procedural rules that will apply to your dispute, but not necessarily the governing principles of law or how your contract will be interpreted.
- Breaches of Forum Selection Clauses. What are the consequences of a party suing somewhere other than the specified forum? In general, the recourse is simply to have the improperly initiated lawsuit dismissed. In some jurisdictions, however, making the forum selection clause a “covenant” might entitle the aggrieved party also to sue for damages resulting from the breach.
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In the euphoria of signing a business deal, no one likes to think of the possibility of later lawsuits. But a few minutes of thought about a well-crafted forum selection clause can save months or years of anguish and inconvenience. Although there is no single “right forum” for all disputes, in most cases, the clearly wrong answer is not to address forum selection at all.
Goodwin Procter’s Business Litigation Reporter provides timely summaries of key cases and other developments within dedicated Business Litigation sessions and related courts throughout the country – courts within which Goodwin Procter’s Business Litigation attorneys are continually litigating. In addition, each issue of the Business Litigation Reporter provides a more thorough discussion of one topic of particular importance to the business community. In this issue, we discuss forum selection clauses and explain the benefits to choosing the forum for litigating any future dispute and the key considerations that go into crafting such a clause. We hope that you find the Reporter useful and welcome your questions.
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Monetary Claims Dismissed in Food Labeling Case. In Ogden v. Bumble Bee Foods, LLC, 2014 WL 27537 (N.D. Cal. Jan. 2, 2014), Judge Koh ruled that the named plaintiff in a putative class action cannot withstand a motion for summary judgment merely by relying on an expert’s promise, made during class certification proceedings, that it will be able to calculate damages for all class members. Defendant Bumble Bee moved for summary judgment on the named plaintiff’s claim for monetary relief on the ground that she had failed to adduce evidence establishing the amount of restitution. The plaintiff’s opposition relied on her class certification expert’s promise that he could develop a formula that would calculate restitution for all class members, but Judge Koh held that a promise to prove damages in the future is insufficient to defeat summary judgment. Following the order, the plaintiff withdrew her motion for class certification and agreed to proceed solely on her individual claims for injunctive relief. (Disclosure: Goodwin Procter LLP represents Bumble Bee in this case.)
Broad Reading of Consent Under the Telephone Consumer Protection Act. In Baird v. Sabre Inc., 2014 WL 320205 (C.D. Cal. Jan. 28, 2014), Judge Wilson held that a consumer who provides her telephone number to a company when making a purchase will be deemed to have provided “prior express consent” to communications from the company via an automated dialing machine. In so ruling, Judge Wilson deferred to a broad interpretation of such consent that was contained in a 1992 order of the Federal Communications Commission and rejected the plaintiff’s arguments to repudiate that broad interpretation. Because of his ruling that the plaintiff had consented, Judge Wilson did not reach the separate question of whether the communication at issue in the case – technology that transmitted a text message – constituted an automated dialing system covered by the TCPA, an issue on which the FCC has recently solicited public comment.
Shareholder Inspection Rights Bounded. In Cook v. Hewlett-Packard Co., 2014 WL 311111 (Del. Ch. Jan. 30, 2014), the Court of Chancery rejected an HP shareholder’s request that HP produce not only documents concerning HP’s decision to acquire another company (Autonomy), but also documents concerning alleged wrongdoing at Autonomy prior to the acquisition. Vice Chancellor Glasscock held a shareholder’s inspection request must relate to the conduct of the company itself. As such, he held that the shareholder’s request for documents relating to Autonomy’s conduct prior to the acquisition amounted to an improper “fishing expedition” that could not uncover evidence of wrongdoing by the HP board.
Limits on Court of Chancery Jurisdiction in Cases Seeking Monetary Relief. In MAG IAS Holdings, LLC v. Fives Machining Systems, Inc., No. 9057-VCN (Del. Ch. Feb. 6, 2014), Vice Chancellor Noble dismissed a post-closing dispute for lack of subject matter jurisdiction. The plaintiff argued that the Court of Chancery had jurisdiction because the complaint both asserted “equitable” claims and included a demand for specific performance based on the parties’ contract. In its bench ruling, however, the court held that because the complaint sought money damages and such damages would constitute an adequate remedy (even assuming that any remedy were warranted), the Court of Chancery lacked jurisdiction over the lawsuit. The court also held that the limitations on the court’s jurisdiction could not be modified by the terms of the parties’ contract. (Disclosure: Goodwin Procter LLP represented Fives Machining Systems, Inc. in this case.)
Passive Website Does Not Create Personal Jurisdiction. In Skyworks Solutions, Inc. v. Kinetic Tech., Inc., No. 13-10655-GAO (D. Mass. Dec. 23, 2013), Judge O’Toole rejected the plaintiff’s argument that the fact that an out-of-state company’s website was accessible by Massachusetts residents was enough to give Massachusetts courts personal jurisdiction over that company. Agreeing with prior Massachusetts state and federal court rulings, the court emphasized that the website in question was a “passive” one – that is, it provided information but did not allow the visitor to make a purchase or take any other action – and held that the company therefore could not be said to be “transacting business” within Massachusetts.
Narrow Reading of the Revival Exception to the Deadline for Removing Cases. In GeoVantage, Inc. v. SimWright, Inc., No. 13-12178-RWZ (D. Mass. Jan. 16, 2014), Judge Zobel narrowly construed the judicially created “revival exception” that allows a defendant to remove a case from state to federal court, after the normal 30-day time limit for removal has expired, where an amended complaint changes the nature of the case. The plaintiff, a developer of digital imaging technology, sued the defendant for breach of contract but later amended its complaint to add claims for misappropriation of confidential information and trade secrets. Finding that the new claims and allegations merely built upon the facts alleged in the initial complaint, Judge Zobel held that the “essential identity” of the case remained unchanged and hence the revival exception to the 30-day removal deadline did not apply.
Indemnification for Attorneys’ Fees Must Be Unmistakably Clear. In Wells Fargo Bank National Assoc., et al. v. Webster Business Credit Corp., Index. No. 601680/09 (1st Dep’t Jan. 23, 2014), the Appellate Division, First Department, held that unless a contractual indemnification provision evinces an “unmistakably clear” intent that one party will indemnify the other not just for its losses but also for its attorneys’ fees in any litigation between them, the American Rule that each party will bear its own attorneys’ fees will not be disturbed. The court held that this standard was not met because the indemnity clause in the parties’ contract could be read to apply to claims by a third party, rather than claims against each other.
E-Discovery Cost Shifting Principles Clarified. In Brandofino Communications, Inc. v. Augme Technologies, Inc., No. 652639/11 (N.Y. Sup. Ct. Jan. 24, 2014), Justice Oing held that the party producing documents must bear the costs of production, including costs arising from the specific production format specified in the discovery request. The defendants argued that they should not have to bear the additional costs involved in producing the documents in the format requested by the plaintiff (as text searchable TIFF files with metadata preserved, formatted for use in Concordance), rather than as a PDF file. Applying the seven-point cost-shifting analysis adopted by the Appellate Division in 150 Nassau Associates LLC v. RC Dolner LLC, 96 AD3d 676 (1st Dept 2012), Justice Oing held that because of the greater usefulness of text searchable TIFFs with metadata as compared to a mere PDF, the plaintiff’s format specification was not merely for its convenience and hence the defendants had to bear the costs of production.
Recent Rules and Judiciary Developments.
Commercial Division Monetary Threshold Increased. Effective February 17, 2014, the monetary threshold for a case to qualify for the Commercial Division of the New York County Court was increased from $150,000 to $500,000.
Justice Barbara Kapnick Elevated. Effective February 3, 2014, Justice Kapnick was elevated to the Appellate Division, First Department. Justice Saliann Scarpulla will take over Justice Kapnick’s place in the Commercial Division. Justice Scarpulla was an associate at Proskauer Rose Goetz & Mendelsohn, Senior Vice President and Bank Counsel at Hudson United Bank, and Justice Eileen Bransten's Court Attorney before becoming a Judge in the Civil Court of the City of New York in 2002. Justice Scarpulla had served as an acting Justice of the Supreme Court, New York County, since 2009.
Expedited Procedures Proposed. The Commercial Division is considering a proposal (proposed Rule 9) under which parties may agree at the beginning of a case, or by contract, to utilize the Commercial Division’s accelerated adjudication process under which all pre-trial proceedings will be completed within nine months of filing the Request for Judicial Intervention. The proposed rule responds to concerns that litigation in the Commercial Division has become more cumbersome and costly as dockets have increased.
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